Coal Mining Pricing in slowdown risks - by Erindra Krisnawan
________________________________ Downgrade from Overweight to Neutral. We are downgrading the coal sector to Neutral as we expect a possible global-growth slowdown to affect coal prices in 2H11 and 2012. We have cut our FY11-13 earnings estimates for coal stocks by 2-18% as we no longer expect ASPs in 2H11 and 2012 to lend support to earnings. After a 15% correction in the past month, the sector trades at 11.1x CY12 P/E, or 0.6 standard deviation below its 3-year mean (vs. a bottom of -2.6 standard deviation in Dec 08). This implies that the sector is pricing in a 23% probability of recession, still slightly more upbeat than our house and consensus view of 30%. We have cut price targets by an average of 18%, as we now apply a probability-weighted P/E target of 11.2x to the sector (previously, implied P/E target of 13.3x, based on DCF), which translates to limited upside from current levels. Until greater clarity on global growth emerges, we expect share-price catalysts to come mainly from any earnings upside rather than P/E re-ratings. Our top picks are Harum Energy, PTBA and Sakari Resources.
